The Kyoto Target

  (a)  It is now widely accepted that the UK must meet its Kyoto target for reductions in greenhouse gas emissions and further more stringent targets thereafter. The question is how, not whether, greenhouse gas emissions can be reduced. In order for the UK to meet its legally-binding 12.5% target for reductions in greenhouse gas emissions, action is required to prevent CO₂ emissions increasing over the course of the next decade (paragraphs 6 and 9).

Meeting the Target

  (b)  We share Lord Marshall's view that all sectors of the economy must contribute to reductions in greenhouse gas emissions. The Government must not make industry bear the brunt of the emissions reductions required for the UK to meet its Kyoto target because of the perception that this might be the easiest and politically most expedient course. We believe that the Climate Change Levy could improve the energy efficiency of at least some of the UK's industrial and commercial sectors and thereby reduce carbon dioxide emissions. Although the Climate Change Levy might assist the UK hit its Kyoto target for reductions in greenhouse emissions, it will not be the only tool necessary for the job, all the more so if the Government has serious ambitions of achieving its target of a 20% reduction in CO₂ emissions from 1990 levels by 2010 (paragraphs 6, 10 and 20).
(c)  We are not persuaded that the Government can set emissions reductions targets, or establish effective monitoring and compliance procedures, for the great majority of small and medium sized enterprises. Nor are we convinced that the Government is better able than the market to steer firms towards the energy efficiency improvements needed to cut emissions. Indeed, we were surprised by the enthusiasm expressed by so many business representatives for Government intervention in their industries when we have become accustomed to the mantras that "the market knows best" and "the Government should regulate with a light touch". Regulatory approaches to emissions reductions have a role to play in ensuring the UK meets its Kyoto target, but we reject the argument that regulation by itself will prove sufficient (paragraph 13).
(d)  We were surprised to hear of the depth of the Minister for Energy and Industry's commitment to emissions trading. The Government has sent out mixed messages on the feasibility of a national carbon emissions trading scheme being quickly introduced. We see no reason why the UK should hold back from developing its own carbon emissions trading scheme ahead of the proposed international scheme, which the UK might be in a strong position to influence. We seek early clarification from Government of its views on whether a national carbon emissions trading scheme, if feasible, should be introduced prior to the start of an international scheme (paragraph 15).
(e)  One of the major aims of the Climate Change Levy is to incentivise small and medium sized enterprises, many of whom are not likely to become involved in emissions trading, to use energy more efficiently. The Levy cannot therefore be dismissed as a short term measure, introduced in lieu of emissions trading and likely to be abolished once such trading begins in earnest (paragraph 16).

Impact of the Levy

  (f)  We have been disturbed by the unprecedented scale of the reaction to the Government's proposal. We share the view expressed by several witnesses that, without appropriate modifications and exemptions, the Levy could prove a blunt instrument which does considerable damage to sectors of the British economy already struggling to maintain their profitability (paragraph 26).
(g)  It is imperative that the Levy makes special provisions for energy intensive industries, such as to minimise any damage to their international competitiveness (paragraph 26).
(h)  The Government must pay attention to the regional, as well as the sectoral, effects of the Climate Change Levy, especially in relation to Northern Ireland, which has an entirely different energy market to that operating in the rest of the UK (paragraph 27).
(i)  There will be gainers from the Levy, such as, for instance, the financial sector, but any competitiveness gains they might make if the Levy was introduced have so far been overlooked (paragraph 25).

Recycling Revenues

  (j)  We received the distinct impression that there was considerable confusion over the meaning of the phrase "revenue neutral", and that some witnesses had wrongly assumed that it was intended to convey the impression that no firm or sector would lose out as a result of the introduction of the Levy. The phrase is not even an accurate description of the Levy's effect on public finances, since there will be a net saving on public expenditure due to the public sector's reduced liability for National Insurance contributions (paragraph 28).
(k)  As with the need for a broad range of policy options to pursue reductions in greenhouse gas emissions, we believe that there should be a diversity of approaches to recycling the revenues raised by the Levy to the business and commercial sectors. More subtle mechanisms are required than those proposed in order to prevent inequitable distributional impacts which might harm British industry. We are attracted by the option of using tax incentives which promote energy efficient investment to recycle at least some of the revenues raised by the Levy. We recommend that the Treasury seriously consider this option, and, if they choose to reject it, explain in detail the basis for their decision (paragraph 30).
(l)  We are loath, at this stage, to press for an increase in the size of the fund intended to be set up to channel some Levy revenues into energy efficiency and renewables projects when there is so much uncertainty as to its intended functions. We recommend that the Government publicly consult on the options for distributing the fund. We also suggest that the Government indicate its long-term plans for the fund, including the circumstances in which the size of the fund might be increased (paragraph 32).

Carbon or Energy Tax?

  (m)  There would appear to be some confusion within Government about the extent to which the Climate Change Levy could and should reflect the carbon content of fuels. A full carbon tax would clearly conflict with DTI policy on the use of coal and gas for electricity generation. On the other hand, there is a logic deficit inherent in the proposal that electricity generated by fuels which do not cause greenhouse gas emissions should be taxed at the same rate as electricity generated by fuels which do cause such emissions. We recommend that the Government seek ways to link the Levy, at least broadly, to the carbon content of fuels (paragraph 36).
(n)  We recommend that ways are found to exempt from the Levy electricity generated by renewables technologies without excluding those for which there are no curent plans for new plant (paragraph 37).
(o)  We are not convinced by the Government's case for ruling out an exemption from the Levy for electricity generated by nuclear plant (paragraph 38).
(p)  We recommend that the Government use the design of the Climate Change Levy to give a fiscal boost to the installation of CHP capacity in the UK (paragraph 39).

Treatment of Intensive Users of Energy

  (q)  The IPPC regime is designed to deal with industrial pollution and is only indirectly related to the energy intensity of industry. Administrative convenience would seem to be the only reason why the Government has chosen to use IPPC coverage to define energy intensive industries. We understand that DTI is updating its ten year old figures on energy use by UK industry. These figures should be used to specify which firms and plant are energy intensive and therefore deserve special treatment under the Levy. The use of other, less accurate, measures of energy intensity is likely to create anomalies and inequities which will serve only to discredit the Levy (paragraph 41).
(r)  DETR's door seems to be open to a wide range of firms seeking special treatment under the Levy. We seek clarification from the Government of those sectors with which it is currently negotiating agreements on energy efficiency. We are concerned, however, that the Government is considering negotiating 25 or more agreements, some with sectors which are not intensive users of energy, when the efficacy of such agreements is untested, and the experience reported by the chemical industry less than persuasive (paragraphs 42 and 44).
(s)  There will not be negotiations between industry and the Treasury about the reductions in the rate of Levy offered as a result of energy efficiency agreements being reached — these will be decided within Government, possibly entirely within the Treasury. The mechanism, if such exists, by which information about the quality of the agreements reached can be factored into the process of deciding the reductions to offer firms is not obvious, particularly since the Treasury is not represented in the talks between DETR and industry representatives. We ask the Treasury to think again about the way in which it intends to offer reductions in the rate of Levy to firms. This approach has done nothing to encourage a cooperative relationship between Government and industry on emissions reductions and we are concerned about the investment implications of the uncertainty about the rates of Levy which will apply to many major UK manufacturing industries (paragraph 43).

Government Energy Policy

  (t)  The Government's policy on the taxation of energy use is pulling in a different direction to the commitment of DTI and the Office of Gas and Electricity Markets to reduce energy prices. If energy prices continue to fall then the signal which the Climate Change Levy is intended to give to industry about the importance of energy efficiency will be obscured. The conflict between these two aspects of the Government's energy policy must be urgently addressed, particularly if businesses are to receive some indication of the long-term direction of that policy, as Lord Marshall recommended (paragraph 21).
(u)  There is a tension between the Government's desire to protect the coal industry and the need to cut back carbon dioxide emissions which, at least partly, explains the reluctance to link the taxation of energy use to the carbon content of fuels (paragraph 34).

Policy making

  (v)  We are disappointed that the Government, despite a welcome commitment to consult on financial proposals, failed to consult on several of the key decisions determining the design of the Climate Change Levy. At the very least, this has undermined the potential for Government and industry to work closely together on reducing the UK's greenhouse gas emissions (paragraph 46).
(w)  We remain to be convinced that the Treasury has not seen the Climate Change Levy as an opportunity for the Chancellor to offer the majority of the business and commercial sectors a significant tax cut, by reducing employers' NICs, in his next Budget (paragraph 47).
(x)  The Government needs to be aware of, and make use of, the best practice of other countries in relation to energy taxation, not least to help uphold the international competitiveness of UK firms once the Levy is introduced (paragraph 49).
(y)  We hope that the forthcoming meeting between Ministers and industry representatives, announced for the first time at, and possibly in response to, the Committee's evidence session on 6 July, will mark a new approach by the Government to its consultations about the introduction of the Levy. We expect the Government to work closely with industry to achieve energy efficiency gains which do not harm, and indeed might improve, the international competitiveness of industry — the "win, win" situation Ms Hewitt mentioned to us. Recent actions by the Government, particularly the decision taken without consultation, to recycle almost all the revenues of the Levy by cutting employers' NICs, have raised serious concerns about the effect the Levy might have on energy intensive sectors (paragraph 50).

The Way Ahead

  (z)  We anticipate that the Chancellor will be moving the debate on the Climate Change Levy forward when he releases his pre-Budget report in the autumn. We intend to keep the announcements he makes on the Levy under close scrutiny (paragraph 51).